envelope system for budgetingHave you ever heard about David Ramsey’s envelope system? If no, then it’s time to learn about it and how to use it to spend less! David Ramsey is one of top financial experts. He says that this old-fashioned way is very effective for budgeting and we have no reasons not to trust him! Moreover, the envelope system is easy to use and it doesn’t require any special skills or efforts from you. Personal Money Service suggests learning more about this strategy and provides helpful recommendations on making it a part of your financial life.

Bonus: If you have missed our previous post, check it and find out about top 6 mobile apps for budgeting!

What is “The Envelope System”?

It’s an easy and effective way to budget by using envelopes to organize your cash. Yes, it seems like a really old-fashioned way, but David Ramsey has proved, it still works. We live in times of credit and debit cards and most people use automatic tools for their money management. However, the envelope system helps to organize your money and cut spending, so there are no reasons to avoid trying it. You can start using the system in 5 simple steps.

Step 1: Categorize Your Expenses

If you do budgeting and keep track of your spending, this part will be easy for you. If no, then it’s time to review your expenses over the last three month. Start analyzing to figure out where your money goes. Choose key categories of your spending to have a better idea of how much money to allocate for every category.

Step 2: Figure out How Much Cash to Withdraw

do budgetingFirst of all, it’s necessary to understand your goal in using the envelope system. When you only start using it, your goal is to pay cash wherever possible. Paying with cash is smart and practical way to take control over your money and when you do it, you can avoid financial stress. That’s why, before going to the bank to withdraw your paycheck, it’s important to find out how much you have to withdraw. After you subtract the amount you need in your bank from your net pay, you know how much cash to take out. However, do not forget that paying cash isn’t really practical sometimes. For example, it’s better to pay your bills like cell phone, rent, car and life insurance online, so leave enough money in your bank account for these needs.

Bonus: Read how to save money on your cell phone bill!

Step 3: Create Envelopes

Now it’s time to have some fun! Take a pen and make writings on your envelopes. Make one for every category of your spending. If you’re still not sure about what they are, check the list of the most popular ones:

  • Food (don’t forget to check how to spend less on groceries)
  • Vehicle Service
  • Gifts (Birthday, Anniversary, other holidays)
  • Clothing
  • Personal Care
  • Home Supplies
  • Entertainment
  • Charity

Step 4: Put Money to the Envelopes

Let’s get back to the step 1 when you were analyzing your expenses for the last three months. Ask yourself, how much did you spend on food, clothing, vehicle maintenance, entertainment and etc. on average? Be realistic when filling envelopes. For example, if you normally you spend $500 on food, it’s not worth expecting that you can cut food expenses to $100/month.

Step 5: When There’s no Cash in an Envelope…

What to do if you have done spending in a certain category until payday? For example, if you want to go out with friends but your entertainment envelope is empty? Guessing that you can take the money from your food envelope? Wrong answer! In this case, you stay at home and look for free entertainment, for example, reading a book or watching a movie. Maybe it’s not the thing you wanted to hear, but it’s necessary to live within your means and then you’ll be able to keep your finance in a good shape.